San Diego Accuses Callan of Pay to Play Conflicts

August 19, 2005 ( - The city of San Diego has sued a San Francisco pension consulting firm that has helped invest the city pension fund for 23 years, saying it had undisclosed conflicts from a pay to play scheme.

The California Superior Court suit against Callan Associates charged that the firm had recommended the city hire money managers that had paid Callan as much as $500,000, the New York Times reported. The suit alleged that out of 339 money managers under consideration to handle San Diego’s large-capital growth investments, the only half dozen recommended had all made such payments to Callan. Four of the six were also members of the Callan Institute, a body that charges an annual fee of $188,000, the suit said.

The city’s lawsuit also named the pension fund’s actuarial firm as a defendant. It said the firm, Gabriel, Roeder, Smith & Company, had endorsed the unsound handling of the pension fund by city officials and had concealed the fund’s problems.

Gabriel, Roeder was slapped with a participant lawsuit in early July over its work with the San Diego fund, alleging that the firm covered up the fact that a proposed funding plan would lead to a severe plan deficit. (See San Diego Retirees Sue Plan Actuary).   

In addition to operating a pay to play scheme, Callan was accused of not following city investment guidelines it helped write, according to the Times report. For example, even though city guidelines called for all money managers to be ranked in the top 40% of asset managers over a three to five-year period, Callan had recommended the firm of Lincoln Capital Management at a time when that firm ranked in the bottom 8% of its investment class and had been in the bottom 12%.

The lawsuit is the latest development in a scandal surrounding the San Diego pension fund, which is currently staring at a $1.4 billion deficit that is the product of slumping investment values and liabilities exacerbated by generous – and controversial – benefit enhancements approved when the plan’s fund appeared flush with funds.  The resulting scandal has led to the resignation of the mayor, the delay of a $500 million bond issue, restatements of the city’s financial reports totaling more than $600 million, numerous lawsuits and investigations – and vitriolic interchanges between the newly elected City Attorney and SDCERS Board members (see  San Diego City Manager Says He’ll Quit – If the City Attorney Will ). 

The city’s lawsuit follows the publication, in June, of a critical report on pension consultants by the Securities and Exchange Commission. While the SEC report was based on a limited number of firms (24), it claimed that as many as 13 of those consulting firms registered with the agency had conflicts that might lead them to recommend inappropriate investments (See    SEC Calls for Pension Consultant Disclosure Reforms ).